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Being finance savvy is almost always an important component of your overall value to your employer. Even if you are not in a position that has direct responsibility for budgeting, being aware of financial concerns is highly important.
As a manager, your performance is judged heavily on sticking to a budget, and rightly so. For an entire organization to make the profit it wants, it's vital that each area sticks to its budget – after all, budget over-runs come right out of profit.
Clearly, overspending is bad. But under-spending is also a problem – if you have over-estimated what you need, you've tied up money that could have been used more profitably elsewhere in the organization.
You, therefore, need to be crystal clear at all times about how much you're actually spending in relation to your budget: after all, it would be disastrous to pay too little attention to it in the early part of the year, only to run out of money in month 10!
When you manage a budget well, your organization benefits. And anything that is good for the organization's bottom line is generally good for your career. That's why it is so important to get your budget correct from the start, and then find a way to make it work despite the obstacles that inevitably crop up.
There are two main components of successful budget management:
- Planning – estimating a reasonable budget and negotiating the final amount.
- Discipline – committing to work within the budget by assessing and reassigning funds as needed.
Budget Planning
Your first task in budget management is to acknowledge how important the budget document is to your department, the organization, and your performance. While you may not be a finance expert, as a budget manager you are expected to take the financial health of your department very seriously.
Remember, your budget will probably be reviewed by the most senior people in the company. You want to make it as comprehensive and well-thought-out as possible. The bottom line for you is that your performance will be evaluated through your budget. So start early, and get as much help as you need to perfect your budgeting skills. As always, though, the more you know to start off with, the more competent and capable you will be perceived.
Estimating
The first step in budget management is sitting down and determining how much money you will need to achieve what you need to. It's no longer as simple as pulling out last year's budget and adding a few percentage points: organizations now have to run in a lean and efficient way, and every dollar is accounted for much more precisely than in the past.
While you can certainly use previous budgets as a guide, the best approach is called "zero-based budgeting." To prepare a zero-based budget, you start with no dollars in your budget and build a case for the money you intend to spend and, if your budget includes revenue projections, the money you think will be coming in.
This practice will ensure that you really understand the dollar amounts you're asking for and can justify your projections should you need to. Here are some tips which will help you budget more accurately:
- Plan for minimal income (where applicable) and maximum expense. Typically, you hope for the best and plan for the worst.
- Itemize your expenses. Remember the small recurring items like subscriptions and office supplies services that you may need to buy into, such as technical support.
- Build in a bit of a safety net that takes into account the risk inherent in your budget, and create a fair contingency fund.
- Where it's appropriate to the nature of your budget, include investment in employee training and development. Demonstrate that the expenses you include will improve productivity and performance.
- Provide documentation to justify your rationale. Include estimates, assumptions and calculations you used to derive your figures.
- Don't guess. Where possible use real figures.
- Be conservative but not cheap. A really low budget is only impressive if it can be met.
- Align your budget with your organization's strategic plan. If your company is growing, how will this affect your department's expenses? Will the expenses be linear or stepped? What capital expenditure should you be considering? How will the growth affect your staffing levels, and training and development needs?
- Talk to your staff. The budget is not a secret document. Your people are expected to stick to the budget, so they should have input into its preparation. You will get much more co-operation if they understand where the dollars are being spent and why.
Negotiating
Once you have a draft budget prepared, it's time to get approval. This is perhaps the most critical part of the whole budget process. Much of the art of managing a budget is in the up-front negotiation: if you don't negotiate enough, you and your team are in for a hard year ahead. What's more, it's so embarrassing having to ask for more money: the organization's Board will notice this every month when they review year-to-date financials!
The best way to avoid not getting enough is to negotiate from a win-win perspective. This means trying to negotiate for a reasonable figure and having clear evidence to support your budget needs.
- Understand what costs you can control and commit to doing so during the negotiation process.
- Know your options and be prepared to present them. Anticipate where you might get the most resistance, and prepare solid arguments to back up your request.
- Don't excessively pad expenses to make up for anticipated shortfalls elsewhere. These tactics are underhanded and don't add to the trust relationship you need to build for successful negotiation.
- Use historical data if you can't put an actual figure on an item.
Tip 1:
As we've said, you'll need some money set to the side to handle unexpected contingencies. Unfortunately, this is one of the first things that can be cut during budget negotiations. When you start work on your budget, agree with your boss on how you should present contingency amounts, in such a way that they're not cut.
Tip 2:
If people in your team are aware of the budgeting process, it's important that your team perceives a "win" for your budget. Make sure you manage their expectations as well. Don't over-promise, and be as honest about the final outcome as you can. It's important that you work with your team and keep them informed throughout the budgeting process.
Budget Discipline
With your budget in hand, your challenge is now to work diligently to stay within it. To do this successfully requires continuous assessment of where the money is going, and the re-allocation of funds as necessary.
- Monitor spending against your budget regularly. Know what you are spending, and if an invoice comes in that you aren't expecting, deal with it immediately. Find out what happened and get back on track as best you can.
- Try to keep every cost heading on budget each month. Make adjustments as required by moving money between cost headings.
- Investigate persistent overspends as soon as you notice them. Try to fix the source of the over-spending before looking for money elsewhere.
- Put strong internal controls and policies in place to deal with spending. These should be extremely clear about what expenses can be claimed. Your expenditures should not be a surprise.
- Communicate budget results regularly. Talk to your team and your boss about the status of your budget. It's better to let people know about issues before it's too late to remedy the situation.
There is a delicate balance between sticking to a budget and losing out on unexpected opportunities. While it is important to be on budget, if a great opportunity presents itself, you want to be able to exploit it. An important aspect of this is the ability to look ahead. Make sure that you don't get so focused on your short-term budget that you fail to take advantage of a great long-term prospect. If this sort of opportunity comes up, prepare a detailed and persuasive case, and be prepared to argue for it high up in your organization. After all, you will be judged at least as much on performance as on how closely you met your budget.
Key Points
Managing a budget is a valuable skill. Recruiters look for your experience of it and competence in it when filling many managerial positions. In many companies, how well you stick to your budget is a major factor in your overall performance evaluation.
Key components of budget management success are knowing how to estimate budget needs, negotiate for a fair budget, and monitor the budget diligently. Regardless of the position, you are in right now, or the weight your organization places on budget management, understanding the budget process improves your understanding of the business in general. This will help you to be a more effective and productive member of the team, which is a definite bonus to any employer.
